A Markov-Switching Vector Equilibrium Correction Model of the UK Labour Market

IGIER Working Paper No. 185

20 Pages Posted: 6 Apr 2001

See all articles by Hans-Martin Krolzig

Hans-Martin Krolzig

Humboldt University of Berlin - Institute for Statistics and Econometrics

Massimiliano Giuseppe Marcellino

Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR)

Grayham E. Mizon

University of Southampton - Division of Economics

Date Written: December 2000

Abstract

There is a wide literature on the dynamic adjustment of employment and its relationship with the business cycle. Our aim is to propose a statistical model that offers a congruent representation of post-war UK labour market. We use a cointegrated vector autoregressive Markov-switching model where some parameters change according to the phase of the business cycle. Output, employment, labour supply and real earnings are found to have a common cyclical component. The long run dynamics are characterized by two cointegrating vectors: trend-adjusted labour productivity and the labour share. Despite there having been many changes affecting this sector of the UK economy, the Markov-switching vector-equilibrium-correction model with three regimes representing recession, growth and high growth provides a good characterization of the sample data over the period 1966(3)-1993(1). In an out-of-sample forecast experiment over the period 1991(2)-1993(1) it beats linear and non-linear model alternatives. The results of an impulse-response analysis highlight the dangers of using VARs when the constancy of the estimated coefficients has not been established.

Keywords: business cycles, employment, Impulse-Response Analysis, cointegration, regime shifts, Markov switching

JEL Classification: E32, E37, C32, E24

Suggested Citation

Krolzig, Hans-Martin and Marcellino, Massimiliano and Mizon, Grayham E., A Markov-Switching Vector Equilibrium Correction Model of the UK Labour Market (December 2000). IGIER Working Paper No. 185, Available at SSRN: https://ssrn.com/abstract=265898 or http://dx.doi.org/10.2139/ssrn.265898

Hans-Martin Krolzig

Humboldt University of Berlin - Institute for Statistics and Econometrics ( email )

Spandauer Str. 1
Berlin, D-10178
Germany

Massimiliano Marcellino (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Grayham E. Mizon

University of Southampton - Division of Economics ( email )

Southampton, SO17 1BJ
United Kingdom
+44 (0)23 80 592519 (Phone)
+44 (0)23 8059 3858 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
212
Abstract Views
1,717
rank
170,922
PlumX Metrics